Linder Hypothesis – Definition

Cite this article as:"Linder Hypothesis – Definition," in The Business Professor, updated January 18, 2020, last accessed May 27, 2020, https://thebusinessprofessor.com/lesson/linder-hypothesis-definition/.

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Linder Hypothesis Definition

The Linder hypothesis was proposed by Staffan Linder. The theory states that the more similarity a country shares in terms of total income generated, the more similarity they share in the consumption of products by consuming the same quality products and even trading with one another.

A Little More on What is the Linder Hypothesis

The Linder theory was proposed as a countermeasure to the Heckscher-Olin theory which emphasized that countries with varied or different incomes should trade with each other.  The Heckscher-Olin theory states that when two countries produce two goods and use two factors of production such as labor and capital factors to produce these goods, each will export the good that makes the most use of the factor that is most surplus. Reasons due to the production of goods that demands more capital are as a result of higher income levels, unlike labor-intensive goods.

The Linder hypothesis has been able to establish that countries with the same range of income demand, consume and produce a similar range of quality goods and services. Research has shown that income decides export prices and demand. As a result of this, countries with high incomes will demand and consume high-quality goods. Likewise, income is used to estimate demand.

High-quality goods require a large amount of investment or money to produce. This is the main focus of the Linder hypothesis. A good example is the automobile export market which is basically between countries like Japan, Europe and the United States of America.

The core statement of the Linder hypothesis is that countries with similar incomes will share similar demands and trade with each other, even develop similar industries. This is focussed on the demand-based theory rather than the common supply based trade theory.

Proving the Linder Hypothesis

Several unscientific observations have proven the Linder hypothesis to be of utmost relevance and accurate but testing the hypothesis has been difficult as a result of the geographical proximity between the countries sharing similar income. To explain a trade as being active or passive, geographical distance between the countries is a major factor to be considered, hence the reason for lack of test of the hypothesis.

One of the shortcomings of the Linder hypothesis is the lack of a formal model for the theory, this has resulted in different studies testing the hypothesis in various ways and under differing conditions. Some studies have opposing views but lack substantial evidence. They have only provided figures for countries that actually trade, they do not input zero values for the dyads where trade could happen.

The Linder hypothesis has been found to be useful in classifying trade in manufacturing manufactured products versus non-manufactured products. In manufactured products, the effect is basically for trade in capital goods than in consumer goods and also for products that are quite different than for products that share the same similarity in terms of standards.

References for “Linder Hypothesis”

https://www.investopedia.com/terms/l/linder-hypothesis.asp

https://en.wikipedia.org/wiki/Linder_hypothesis

www.economicsdiscussion.net/linders-theory-of-demand/linders-theory…/30832

www.levyinstitute.org/topics/overlapping-demand

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